A zombie loan proposal re-emerges

2020 has not been a good year for thermal coal. Trends that were already underway have accelerated as a result of the pandemic. As the energy source with the highest marginal cost of operation coal has borne the brunt of reductions in electricity demand. As a result, planned closures have been brought forward, and new closures announced.

Financial institutions have announced ever more stringent divestiture policies, making new coal mines and coal-fired power stations increasingly uninsurable and unbankable. Insurance premiums for new and existing coal projects have risen https://www.eceee.org/all-news/news/news-2020/while-coal-premiums-soar-insurance-groups-still-supports-oil-and-gas/

National governments including tmajor coal consumers like China, South Korea and Japan have announced plans to reach zero net emissions by 2050 or 2060. Reaching this target implies a rapid end to new coal projects, and an accelerated phase out of existing ones.

It is striking, then, that emerging reports suggest that the State Bank of India might lend $1 billion to Bravus, the absurdly renamed Adani Mining, to finance its Carmichael coal and rail project in the Galilee Basin. A similar proposal, which reached the stage of a memorandum of understanding, was considered and rejected back in 2014.

A source associated with the proposal has been quoted as saying the situation has changed:

Much water has flowed in the last 5-6 years. The concerns raised in 2014 are no longer there. Most of the local regulatory approvals are in place and the company is expected to start producing coal from 2021 onward

This is, at best, a half-truth. Despite winning approvals and commencing construction, the mine is as controversial as ever. Even if Bravus succeeds in shipping coal, the pressure to shut the project down will be relentless, and sooner or later, successful. In particular, the toxicity of the project is such that even financial institutions without a strong general divestment policy have refused to touch it.

Considered as a commercial investment, the proposed loan looks far worse than it did in 2014, and not just because of the general decline of coal. The original proposal was for a $6 billion dollar project, producing up to 60 million tonnes of coal a year by 2022 The exposure of SBI, as a senior secured lender, would have been a small fraction of the total project value.

In 2018, however, Adani announced a revised project, with a cost of $2 billion, to produce 10 million tonnes of coal a year. The proposed loan from SBI would amount to half the project’s value. If the project falls short of its goals regarding output, sales price or cost efficiency, SBI will very likely be exposed to some of the loss.

The problems continue at the other end of the chain. The project has always been envisaged as a ‘pit to plug’ operation with coal from Carmichael being delivered (via Adani-owned railway, port and shipping) to Adani’s power plants in India. The most important candidate is the proposed Godda power station, which has a contract to export power to Bangladesh at prices that aren’t competitive with low-cost renewable energy, or even with other coal-fired power. Now that Bangladesh looks like abandoning or scaling back its coal-based strategy for domestic electricity generation, this contract could well be repudiated or renegotiated.

The only thing that has shifted in Adani’s favour is the domestic political situation in India. In 2014, Narendra Modi was a populist demagogue, fond of cronyist politics, but most of the institutions of Indian democracy were functioning as checks on outright corruption. During the Trump presidency, Modi has moved, like others of his kind, towards a personal dictatorship, where these constraints are weaker. Perhaps he can push SBI to offer his good friend Guatam Adani a loan that is unlikely to be repaid.

However, it’s been some time since news leaked of the supposedly imminent decision on the loan. Perhaps the board of SBI has seen sense. Or perhaps the rumor was never solidly based. With luck, the whole idea will simply fade away.

4 thoughts on “A zombie loan proposal re-emerges

  1. We only need a federal and/or relevant state government to legislate “no new coal mines”. It’s that simple in principle. Then it doesn’t matter what any bank does; state or commercial, foreign or domestic. As I keep saying; take state (dirigist) action. In a democratic society that means the people induce the required decision via voting in and out governments and thus telling the markets, financial powers, corporations and oligarchs what to do… or more colorfully, where to go.

    Warning on the democratic packaging: This product may require some direct action too!

  2. I think they should be ‘allowed’ to open the mine. Its inevitable failure will be fun to watch and serve as a great example to others who might be considering investing in coal. This will be FAR, FAR more effective than banning it.

  3. State Bank of India eh? A proponent of privatisation would just say “well what did you expect?”

    A fair point such proponents make is that outright corruption is more, not less, likely without the constraint of profitability.

  4. Both share and bond holders in SBI are biting back, saying that opening Carmichael is against their policies and bad for business.

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